Financial Institutions
Murabaha
A type of transaction called “Murabaha to the purchase order”, which involves the customer giving his word to purchase the item from the institution; this type is different from the normal Murabaha, as it doesn’t involve such a promise by the customer.
The Murabaha to the purchase order is the sale of an item by the institution to a customer (the purchase order) for a pre-agreed selling price, which includes a pre-agreed profit mark-up over its cost price, and it has been specified in the customer’s assurance to purchase.
Normally, a Murabaha to the purchase order transaction involves the institution granting the customer a Murabaha credit facility. It also typically involves deferred payment terms, but such deferred payment is not one of the essential conditions of such transactions. Contrarily, a Murabaha can be arranged with no deferral of payment. In this case, the mark-up will only include the profit the institution will receive for a spot sale and not the extra charge it will receive for deferral of payment.
Ijarah
The term Ijarah means the leasing of property pursuant to a contract under a specified permissible benefit in the form of a usufruct is obtained for a specified period in return for a specified permissible consideration.
Istisna’a
Istisna’a is a contract of sale of specified items to be manufactured or constructed, with an obligation on the part of the manufacturer or builder (contractor) to deliver them to the customer upon completion.
Ijarah Muntahia Bittamleek
One of the forms of Ijarah used by Islamic financial institutions is Ijarah Muntahia Bittamleek. This is a form of leasing contract that includes a promise by the lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijarah period or gradually during the term of the contract.
Mudaraba
To understand Mudaraba, you must first define Sharika (Musharaka), which is an agreement between two or more parties to merge their assets or to combine their services, obligations, and liabilities with the aim of making profit. A Mudaraba contract is distinguished from a Sharika (Musharaka) contract by the following:
The basis for earning a share of profit in the Sharika is the required capital contribution of all parties, whether in the form of cash, commodities, services, or liability in case of a reputation partnership and that the subject of the contract is based on a single element, i.e. capital.
On the other hand, the basis for earning profit in Mudaraba comes from two elements; the first element is the existence of capital that is subject to, and resembling the conditions of Sharika capital, the second one is the work done by the Mudarib that is different from the capital of the venture.
In Sharika, the work, generally, must be mutual by the parties, however in Mudaraba it is only the Mudarib who works.
